The U.S. dollar was mostly flat against major peers on Tuesday as markets continued pricing in a dovish response from the Federal Reserve in the wake of softer economic data.

The euro eased away from two-month highs of $1.161 touched on Monday and was last up 0.07% at $1.1587.

Data in the past few weeks have pointed to a softer U.S. economy, including unexpected job losses last month and mild inflation readings, leading investors to scale back expectations of an interest rate hike by the U.S. Federal Reserve.

Market pricing for a September quarter-point hike flipped toward a near-70% chance of a hold, after recent news of unexpected job losses in July and other economic data.

“Current levels, particularly dollar-denominated pairs, are just reflecting the surprised dovishness we saw in the last Fed meeting or at least the interpretation of dovishness,” said Eugene Epstein, head of structured products for Moneycorp North America in Stamford, Connecticut.

“Leading up to the last Fed decision, Chair Kevin Warsh appeared to be a hawk. But now it appears not to be the case or at least that’s not something the market is interpreting at this point. Combine that the data we’ve seen in terms of CPI, which did not imply inflation, and the last jobs number did not imply inflation as well. So suddenly, you have the dollar weakening and that is reflective across most currency pairs,” he added.

The dollar was 0.15% higher against the Swiss franc to 0.812.

Sterling was up 0.01% against the dollar at $1.35420, just shy of the three-month peak it hit in the previous session.

Inflation Fallout

Joint U.S. and Japanese intervention to strengthen the yen in late July has also weighed on the dollar more broadly.

Analysts remain cautious about where inflation may head, with the critical Strait of Hormuz remaining effectively shut and the U.S.-Iran conflict simmering.

“Inflation has been above target for most of the past five years, and whilst a high 2% annual pace may prove acceptable to the Fed, it leaves the inflation process with little to no breathing room in a world of constant supply shocks,” said Nohshad Shah, head of EMEA fixed income sales at Citadel Securities.

Iran said it would shift to a “fully offensive” military posture because efforts to negotiate a permanent end to the war have stalled, a senior Iranian official told Reuters as Washington ruled out extending their June ceasefire agreement.

The more than five-month-long conflict has stoked inflationary concerns and upended the global interest rate outlook.

Bond yields around the world were on the rise again, partly due to traders’ concerns about the impact on energy prices of a prolonged closure of the Strait of Hormuz. [US/]

U.S. 30-year Treasury yields rose to their highest level since 2007, while yields around the world moved higher. Yields move inversely to prices.

Brent crude futures held steady around $90.82 a barrel, after earlier touching their firmest levels since July 30. [O/R]

The Japanese yen was 0.3% weaker at 159.51 per dollar, having erased nearly half of the gains from the joint U.S. and Japan intervention at the end of July to lift the fragile yen away from a 40-year low of 163.99.

Traders are focused on the threat of more intervention as well as the Bank of Japan meeting next month, where the central bank is set to raise interest rates.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.04% to 99.58.

The Australian dollar  strengthened 0.06% versus the greenback to $0.7107.

The dollar  strengthened 0.04% to 6.745 versus the offshore Chinese yuan.

(Reporting by Chibuike Oguh in New York and Harry Robertson in London; Editing by Hugh Lawson)